Blockstream's Bitcoin Mining, IBM's Blockchain Browser and DLT in 10Ks

Off the Blocks | Vol 80, August 13, 2019

Our views on blockchain technology & the changing investment, regulatory and tech landscape.

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Reliance’s Blockchain Ambitions

In Nov 2018, Reliance Industries, the largest Indian company, in a trade finance transaction, received a letter of credit from Tricon Energy. This would have gone unnoticed by everyone involved, except that the transaction, involving the exchange of export documentation, took less than a day, instead of the usual 7 - 10 days. This was the first transaction on a blockchain enabled platform involving Reliance.

Fast forward to August 12, and Reliance Jio Infocomm (Jio), Reliance’s mobile network subsidiary, announced that it is rolling our one of the largest blockchain networks across the world.

Over the next 12 months, Jio will install across India one of the largest blockchain networks in the world with tens of thousands of nodes operational on day one.

- Mukesh Ambani, CEO, Reliance Infocomm

Jio has over 340 million subscribers mostly for its mobile broadband access services and if it was listed as a separate business, it would still rank amongst the top 10 companies in India.

However, Jio is only a 3 year old company. For any other operator, such a public announcement would be seen as ridiculously ambitious. However, Jio is agile, digital first, data heavy and does not carry the burden of legacy technology.

In 2018, India had 432 million 4G users downloading more than 10GB of data per month. While 70% of the demand is from video streaming, this is expected to change dramatically as IoT, cloud applications and virtual reality content start to come online.

Image result for india mobile data traffic
Image Source: Times Of India

Jio also announced that it has entered into a globally unique long-term alliance with Microsoft to accelerate the digital transformation. Azure cloud services running on Jio datacenters creates a meaningful infrastructural play for localization of data, both physically and linguistically. With the explosion of data, telecom companies like Jio are in a perfect position to take advantage of other emerging technology, namely blockchain. The opportunity is not lost on Jio. With 5G services around the corner, and data explosion imminent, Jio is preparing itself to leapfrog technology cycles by adopting blockchain. The partnership with Azure is an astute way of brining managed blockchain services to Jio’s datacenters.

With hyper-connectivity telecoms know that they will be more than simple conduits of data. Using blockchain telecoms can deliver unprecedented security, trust, automation and efficiency to almost any types of transactions. Mobile carriers, with a unique access to subscriber’s phones or industrial IoT devices can be instrumental in creating local and global standards for identity management - for both humans and interconnected machines. These standards can help reduce fraud and cut down payment settlement times - specially for supply chains transactions in India that are notorious for delays. Jio, with its 340 million strong customer base, and an expanding business footprint, is an attractive partner for fintech companies. If together they can shave off a few percentage points off transaction costs it would be a highly lucrative business proposition. Other blockchain possibilities for telecom firms are detailed in a graphic below.

Image Credit: Infosys

This is a vital capability for India especially for modernizing our supply chains for agricultural produce and other goods. Using blockchain, we also have an opportunity to invent a brand-new model for data privacy where Indian data especially customer data is owned and controlled through technology by the Indian people. Data is wealth and Indian wealth must remain in India.  

- Mukesh Ambani

Expect countries to create regulatory environments that curtail access to local data for foreign entities.

Now some significant news form the world this week:

  1. Mining | Blockstream Reveals Massive Bitcoin Mining Facilities: Blockstream revealed details related to their massive Bitcoin mining data centers in Quebec, Canada and Adel, Georgia. The facilities account for a combined 300 megawatts worth of energy capacity, and they’re currently available for hosting enterprise-level mining activities, in addition to Blockstream’s own mining operations. For now, two of their active customers include Fidelity Center for Applied Technology and LinkedIn founder Reid Hoffman. the facilities would account for roughly 6 exahashes of Bitcoin mining power if used at full capacity with the latest ASIC mining hardware. This would have equated to 10% of Bitcoin’s total network hashrate less than a month ago. [… Read More on Forbes]

  2. Patents | IBM Files Patent for a Blockchain-Based Web Browser: A new patent application from IBM describes a blockchain-based web browser. IBM’s patent is for a web browser backed by a peer-to-peer network. The browser collects pre-specified information from web browsing sessions, according to the patent. The information is then transferred to a network of peer-to-peer nodes for collection and storage. Information collection depends on the type of browsing experience chosen. Browsing on a work computer versus a personal browser would demand different settings, for example. Types of potentially storable session information include what websites one visits, bookmarks, task performance, geolocation, plugin installation, and security patches. Interestingly, IBM included a token in their model. IBM says tokens will verify a users browser session activities as they are packaged into blocks for the peer-to-peer network.  [… Read More on Coindesk]

  3. Regulations | Crypto Regulations Are Changing Worldwide to Comply With FATF Standards: Fifteen nations are planning to create a global system “to collect and share personal data on individuals who conduct cryptocurrency transactions. The G7 members, Australia, and Singapore will develop the new system.” The G7 members are France, Japan, Canada, Italy, Germany, the U.K., and the U.S. The system will be designed in consultation with the FATF with the goal “to draw up detailed measures by 2020.” The FATF is an intergovernmental organization founded to develop policies for combating money laundering. It currently comprises 37 member jurisdictions and 2 regional organizations. [… Read More on]

  4. Autonomous Driving | Commerzbank Develops Blockchain Payments for Automated Trucks: Commerzbank has developed a blockchain-based solution for machine-to-machine payments that it says could be used to allow automated trucks to pay for power charging without the need for a human to get out their wallet. The partners have already proved the system works, according to an announcement on Thurday. In test transactions, Commerzbank put euros on the blockchain system and sent it to Daimler Trucks for the settlement of the payment. [… Read More on Coindesk]

    Following the recent digitization of securities transactions and the use of blockchain technology, we are now focusing on DLT-based payment structures. As a bank, we naturally also see our mission as creating new digital payment architectures for our customers.

    - Stephan Müller, divisional board member of transaction banking at Commerzbank

  5. Hashgraph | IBM and Tata Become Governing Council ‘Owners’: Public distributed ledger Hedera Hashgraph has announced that IBM and Tata Communications have joined its governing council.

    Our governance model, which includes a robust system of checks and balances, ensures power can’t be consolidated, while at the same time providing a stable and scalable platform on which developers can build.

    - Mance Harmon, the CEO of Hedera Hashgraph

    Up to 39 multinational entities will make up the Hedera Governing Council. Each member can serve a maximum of two consecutive three-year terms, and they are responsible for eliminating the risk of forks and guaranteeing the integrity of the codebase. A variety of enterprises from telecommunications, retail, law, financial services and technology are now represented on the council. [… Read More on CoinTelegraph]

The Final Word | Blockchain in Business: What Do Companies’ 10-K Reports Say About DLT?

Number of 10-K reports that included the terms "blockchain" or "distributed ledger"

How seriously are American corporations committed to blockchain technologies? Are blockchain technologies materially significant yet? One place to find the answers to these questions is Form 10-K, a report the United States Securities and Exchange Commission (SEC) requires corporations to file annually. The following companies cited blockchains as a risk factor that could adversely affect their companies: Accenture, American Express, Eastman Kodak, Goldman Sachs, Northern Trust, Overstock, State Street and Visa. Note that Accenture and Overstock (like several other companies) discussed blockchain with both positive and adverse statements in their 10-Ks.  Among the positive statements about blockchains in 10-K reports:

  • Accenture cited blockchain as one of its core consulting capabilities.

  • IBM identified blockchain as one of its core technologies, along with analytics, artificial intelligence, security and cloud computing.

  • Mastercard announced investments and patents in blockchain technology.

  • Nasdaq identified blockchain as a high-growth opportunity and mentioned investments in blockchain technologies.

  • Oracle listed blockchain as part of its software as a service (SaaS).

[… Read More on CoinTelegraph]

About Proteum
Proteum is a global blockchain advisory firm that works with public, private and start-up companies to help them transition into the world of blockchains and decentralized applications. We help companies strategically build their ecosystem and unique capabilities so that they can own and control their future. ProteumX, our accelerator program, invests in and accelerates the time to market for companies building blockchain solutions. |  | Twitter: @proteumio | ProteumX

Walmart Coin, Dubai 2020 and A New Superfast Exchange

Off the Blocks | Vol 79, August 6, 2019

Our views on blockchain technology & the changing investment, regulatory and tech landscape.

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The Walmart Coin

Walmart is not a novice in the blockchain space. Way back in early 2017, long before the ICO craze started, Walmart was one of the first companies to team up with IBM and go all in on adopting Hyperledger as its preferred way of tracking mangoes on a private blockchain. Ever since it has expanded slowly but steadily into tracking food chains and Walmart can trace the origin of over 25 products from 5 different suppliers using a system powered by Hyperledger Fabric. In the meantime, IBM has experimented with tokens and recently launched World Wire, a remittance service based on cryptocurrencies.

So, it was not a surprise when last week a patent application filed by Walmart was published that detailed the retail giant’s ambitions in the cryptocurrency space. It’s vision of the world: A Walmart Coin.

Instinctively, many were quick to compare it with Facebook’s Libra. However, it must be mentioned that the Walmart patent application was filed in January 2018, much before Facebook had announced any plans for jumping into the crypto arena. Even if for bragging rights, it does make them a pioneer of sorts in this space.

Interestingly, there are a few common elements between the Walmart Coin and Libra. They are both described as a ‘stablecoin’. While Walmart prefers to peg its coin to a regular currency, the Libra is pegged to a basket of regular currencies. Both the digital currencies have a noble aim of providing economic services to people who have been left out of the banking system due to the high cost of serving small holdings.

For example, many people are from low-income households where credit can be a problem and carrying cash can be problematic. The cost of having little money is high because of frequent short-term borrowing, accumulated interest on short-term borrowing that becomes long-term, high bank fees proportional to wealth, high credit card fees, and high payday loan interests, all of which can take money away that could be available--and would be used--to buy necessities. Providing digital currency based on blockchain may overcome the drawbacks associated with the low-income households. 

However, the companies perhaps differ in the scale of their ambitions. While Libra is positioned as a global currency, the Walmart coin has not been backed by official statements. It seems that Walmart is keen to avoid any kind of regulatory scrutiny of its crypto currency in the early stages and is content to develop it almost in a stealth mode. This could potentially be a better strategy and position it for thoughtful adoption as compared to the Libra.

The applications for a Walmart Coin are immense. By some estimates, Walmart paid about $3B in interchange fee to Visa and Mastercard in 2013. Simply eliminating this expense can directly boost shareholder value. Walmart MoneyCenter offers a wide variety of financial services in store. A digital currency can provide the benefit of real time gross settlements for money transfer, remittances, or other forms of payments. This in itself can literally position the coin at the highest echelons of a desirable currency. The Walmart Coin is supposedly pegged to the US dollar. It would not be unthinkable for Walmart to pay its employees in the Walmart Coin through a Walmart wallet, instead of a direct deposit to their bank accounts. Flicking such a switch can completely bypass banking services as we know today. An additional advantage: a huge on ramp to crypto adoption and if done correctly, a huge customer and user lock in for Walmart consumer, employees and anyone who does any business with Walmart.

The retailer already has extensive experience with Walmart Pay and presumably understands the money transmission, custody, record keeping, insurance and banking regulations well enough to keep clear of the issues that have seemingly tripped up Libra. The breaking point is not in the technology, but in making sure that the new system has robust integration points with legacy infrastructure or at least does not abruptly disrupt existing services.

Even though the global unbanked population is close to 2 billion, there are about 5 billion people who access banking services regularly. From an enterprise perspective, the opportunity to service the latter remains much greater.

Now some significant news form the world this week:

  1. Dubai 2020 | KYC-Focused Blockchain Consortium for Businesses: A new partnership between the Dubai International Financial Centre (DIFC), Mashreq Bank and fintech firm Norbloc aims to launch a blockchain-based Know Your Customer (KYC) data-sharing consortium in 2020. As part of the project, the parties will establish a consortium agreement to amalgamate the KYC efforts of future participating financial institutions and government bodies. The program will purportedly create a single digital KYC record, which can subsequently be authenticated with an electronic ID, allowing users to share data with other financial institutions. [… Read More on CoinTelegraph]

    This initiative provides a unique opportunity to harness innovative technology to deliver a seamless experience for both newly established and existing companies at the centre.

    - Arif Amiri, CEO of the DIFC Authority

  2. Security Token | Seychelles Beats Zurich With First Blockchain-Based Equity Token: The operator of the stock exchange in Seychelles is about to win a race that stretches from the white sands of the tropical archipelago to the spotless streets of Zurich: the launch of the world’s first regulated security token on a national stock market. In the next few days MERJ Exchange Ltd., operator of the bourse, will list tokenized securities in its own stock, Chief Executive Edmond Tuohy said in an interview this week. By doing so it will beat competitors including the Swiss exchange company SIX and the Gibraltar Stock Exchange, which are close to introducing the securities. [… Read More on Bloomberg]

    There are a lot of people in the market who want this but there is a big gap at the moment: there is no, at least on the exchange side, well-regulated institution that does listing, trading, clearing, settlement and registry that’s using distributed ledger technology.

    - Edmond Tuohy, CEO, MERJ

  3. Gaming | Blockchain Gaming Part I: The opportunity: Today’s video game industry looks like one dominated by several Triple A companies that push out increasingly expensive, frustrating, and unrewarding games for the global population of billions of gamers. Small-time and indie developers are crushed by their enterprise counterparts, and their labor rarely pays off. Essentially, Nobody is having fun. Fortunately, blockchain provides solutions to the woes of the global gaming industry. Game currencies, items, avatars, gameplay inputs, and even entire games can be propagated on and secured by the blockchain. Proper execution of blockchain into online games suggests players can interact with one another and the games they play in a manner that has never before been possible. It also suggests that developers can formulate new genres of games by emphasizing gameplay elements unique to blockchain gaming. [… Read More on The Block]

  4. GovTech | Blockchain technology key in new Canadian Government policy: Blockchain technology innovation and experimentation is at the centre of a major new policy which government departments in Canada will be forced to implement. The new ‘Policy on Service and Digital’, outlines the future of government service delivery in Canada, with blockchain technology and artificial intelligence the preferred technologies to help drive digital transformation within government departments. The launch of Canada’s blockchain policy comes just days after Canadian Pacific Railway Ltd  announced it was joining the Blockchain in Transport Alliance. [… Read More on]

  5. HealthCare | Blockchain Could Save Industry $100B Annually by 2025: Healthcare blockchain could save the industry up to $100 billion per year in costs related to IT, operations, support functions, personnel, and health data breaches by 2025, estimated a report by BIS Research. Pharmaceutical companies will benefit from using blockchain to track drugs, thus reducing the around $200 billion these companies lose from counterfeit drugs each year, the report noted. Health insurance companies will benefit from using blockchain to reduce IT and operational costs in insurance process and health insurance fraud. BIS Research forecasts that the global healthcare market will increase at a compound annual growth rate of 64 percent through 2025, reaching a value of $5.6 billion by then. The use of blockchain for healthcare data exchange will contribute the largest market share throughout the forecast period, reaching a value of $1.89 billion by 2025. [… Read More on Hit Infrastructure]

The Final Word | Branson-backed cryptocurrency firm launches a super-fast exchange to take on Coinbase

GP: Blockchain CEO Peter Smith 190729
Image Credit: CNBC

Blockchain, one of the world’s largest cryptocurrency wallet platforms, says it’s launched a digital currency exchange aimed at delivering “lightning-fast” trades. The company’s exchange, called The PIT, is the result of a behind-the-scenes effort led by a team of former executives from the New York Stock Exchange, TD-Ameritrade, Google and Goldman Sachs. According to Blockchain CEO Peter Smith, the new exchange’s matching engine Mercury can execute buy or sell orders in “40 to 50 microseconds,” an “order of magnitude faster than other market players” like Coinbase and Binance. The company has raised over $70 million from investors including British billionaire Richard Branson, Alphabet venture arm GV and early Spotify backer Lakestar. It has also accrued over 40 million users, Blockchain said, who will be able to transfer crypto from their wallets to the exchange. [… Read More on CNBC]

About Proteum
Proteum is a global blockchain advisory firm that works with public, private and start-up companies to help them transition into the world of blockchains and decentralized applications. We help companies strategically build their ecosystem and unique capabilities so that they can own and control their future. ProteumX, our accelerator program, invests in and accelerates the time to market for companies building blockchain solutions. |  | Twitter: @proteumio | ProteumX

In Conversation with Lewis Cohen & Token Basics

Off the Blocks | Vol 78, July 30, 2019

Mixing things up a bit, today we are in conversation with Lewis Cohen, co-founder of CohenWilson LLP (better known as DLx Law), and a highly respected name in the blockchain securities arena. Lewis is based in the firm’s New York office (DLx Law also have offices in Washington, D.C. and Wilmington, Delaware).

Lewis Cohen has been a pioneer in the application of securities law to the rapidly changing blockchain ecosystem. He recently led a Pocketful of Quarters to the first-ever no-action relief for sales of a ERC-20 token on the public Ethereum chain, creating a pathway for an actual use case for the token in a gaming application.

Read Press Coverage About The Pocketful of Quarters

Follow Lewis Cohen on Twitter - @NYcryptolawyer

This week Abid Azam and I sat down for a conversation with Lewis to understand his perspective on the direction of crypto/blockchain space with recent regulatory news.

Abid is a partner with Unchained.VC. He is actively working with emerging technology companies in crypto/blockchain. He has a broad background in investing in biotech/healthcare and tech startups. He currently serves as an advisor to a number of startups and accelerator programs. His other interest areas are in fin tech, healthcare and AI/ML technologies.

Abid Azam (AA): When I met you through a mutual friend, you were partner at a Big Law firm and decided to leave. What made you decide to start a  practice solely focused on crypto and blockchain?  

Lewis Cohen (LC): So, the first piece was my general view that blockchain and crypto would change the future of just about everything and it was very important to me to be a part of that transformation. And so then my question was: How best to achieve that? I was fortunate to be at a terrific law firm at the time, Hogan Lovells; however, I also recognized that as amazing and awesome as it was to be in Big Law, it was going to be a bit difficult to achieve what I wanted to do in the confines of a traditional large law firm.  I have always been highly entrepreneurial and realized that blockchain was a very fast-moving area.  That meant that there had to be a lot of flexibility ability to make quick decisions and pivot etc. when needed.   Big law firms are definitely not known for that.  Also, I was exceedingly fortunate to meet my co-founder, Angela Angelovska Wilson, one of the most respected names in the blockchain legal community, almost from the very start. The opportunity to practice directly with Angela and combine our complimentary skill sets and geographic locations was a huge part of my decision to form DLx Law.

AA: Was there any particular inflection point that helped to make the decision to jump into crypto and blockchain?

LC: Absolutely - there were a series of inflection points along the way for me.  Very early on I had the opportunity to work with Matt Corva, General Counsel of Consensys and the amazing team there.  This was a big moment for me and allowed me to better understand ConsenSys’ vision of a more decentralized economy based around blockchain and tokenization.  I also did a lot of my own reading, not only about the technological side of blockchain but also looking at how blockchain represented the cross-section of economics, law, mechanism design, game theory, philosophy, governance and other disciplines.

The more I learned the more became clear how as a lawyer this was really very different than just the Internet. The Internet is hugely important but it doesn't interact with what lawyers do in the same way.

Aman Johar (AJ): The industry works at breakneck speed, but the regulators have been methodical even as they are literally reshaping the environment from what it was at the beginning of 2019.  What is your take on the recent uptick in SEC opinions? 

LC: It is perhaps a misimpression many had that regulators in the US weren't working that hard because the general public wasn’t seeing much activity.  It is important to be mindful that it takes a lot of team effort at any regulatory agency to get comfortable with something as new and different as blockchain, and there are always a lot of stakeholders to bring on board.  Different people at a given regulator are going to have different perspectives and different concerns and, generally speaking, I see that as a positive. However, that also means you've got a lot of people to work with and that process simply takes time.  So I would say that we're now starting to see the fruits of a lot of investment that has taken place over the course of the last 12 to 18 months.

The other thing I would note is that the goalposts the regulators are working toward are constantly moving in real-time, meaning they don’t only have to get comfortable with state-1 of blockchain, they also have to understand states-2 through n, because things like the Facebook Libra proposal come out along the way, changing the landscape.  In addition, other jurisdictions are reacting to blockchain and crypto and coming up with their own policy positions.  So it is definitely not a static environment.  The regulators are trying to figure out how they adopt an strategy that protects the wider community in a very fast-moving and unruly ecosystem.  No easy job, that!

AJ: So how does the regulatory environment here in the (US) compare with other jurisdictions?

LC: I think it is important again to point out the Libra proposal because it was very much a wake-up call to policy makers.  We saw that clearly during the recent Congressional hearings.  Numerous Congressmen asked Facebook why they based the Libra Foundation in Switzerland.  Why couldn't they base it in the U.S.?  It was difficult for them to understand that it was at least in part because of inquisitions like those they were undertaking that companies or organizations in the blockchain space look to be based in other locales.

There was also a recognition at the hearings that the Libra project potentially represents a fundamental challenge to the hegemony of the U.S. dollar. And if a third party private currency could potentially become a widely accepted medium of exchange around the world, then that really does change the dynamic of how the U.S. not only regulates but also interacts with other economies.  It is a scary thought that it may be beyond the power of Congress to prevent this.

But the reality is that at some point crypto-based decentralized systems may not need the U.S. to be viable.  Other jurisdictions may be much more friendly and so US policy makers and regulators have to balance on the one hand appropriate protections for U.S.-based investors and other market participants with the risk of our country being left behind by other jurisdictions that are more pioneering.

So I think that, when you're looking at the regulatory landscape, you have to appreciate how dynamic an environment it really is.

AJ: Do you think the current regulatory environment is conducive to doing something on a global scale. Does the regulatory environment itself need to be rewritten for this industry?

LC: Yeah - that’s a great question. There are a lot of things that don't work well with crypto. My personal view is that we shouldn't be too quick to blame the regulators. There's a cart and a horse problem and I think that the starting point for crypto and blockchain always has to be a utility for real-world problems.  If we start to see products that are used or could be used by real people in real situations, I think the regulatory impediments will find a way of being resolved through interpretation or amendments to rules or even amendments to statutes.

I think what the industry needs to do is create usable products or at least show that there are blockchain-based products that real people would use.  When regulators look at a lot of the activity that has occurred to date, they see products that are really just - trading.  Much of the industry spends its time simply creating new products to be traded.

An analogy I use sometimes is people playing poker and after a while they get bored with playing cards they are using and get obsessed with designs on the back. They want a different design of the back but they're still just playing poker. And most of the tokens out there - that's all they are: the same as all the others but with small differences in design to keep traders interested.

AA: I wanted to actually discuss the recent and the first  SEC approval of Reg A+ offering of Blockstack. What's your take on that decision by the SEC and Blockstack.Would you say beneficial or were there any drawbacks to that approach?  

LC: Blockstack took their own decision to treat their token as a “security” - one assumes in consultation with their counsel and as a result of discussions with the SEC.  I respect that approach and that it was determined to be the best available solution for Blockstack.  However, this does not mean that it will prove to be the best long-term solution for most crypto projects.  I believe that it will be challenging - I mean really challenging - to create a decentralized marketplace when your token is treated as a security.

Blockstack did a great service for the industry, but I think that their approach needs to be looked at not so much as an end-state but rather as the beginning of a much longer discussion of when blockchain tokens should properly be treated as “securities”.

One point I really struggle with, though, in the Blockstack approach is the idea that, without any change to its underlying terms, a token can go from being a “security” to not a security.   That is, the idea that a transformation in the nature of an asset can occur based only on external factors (rather than being based on something that fundamentally changes in the asset itself).   Going forward, I think we will have a more elegant solution to the legitimate concerns about balancing disclosure on the part of someone raising funds and transferability of a software product that is not in and of itself a “security”.

AA: So do you have a position on security tokens in or that if they're issued more like equities vs Utility Tokens. 

LC: First off, I really don’t like the term “utility token“.  It was much misused during the ICO boom and really doesn’t mean what most people think it means.  

The fact that any object (token or otherwise) has some “utility“ does not mean that it’s offer and sale would not constitute a “securities offering“, which is what most people care about.  So I urge folks just to drop that term like a hot potato.

Regarding “security tokens”, it is important when we use that term that we clarify what we mean.  When I use the term “security token”, I mean something that is intended to be security at all times by the issuer.  This means that the token is or represents either a debt instrument or an equity instrument, some variant of those, or combination of their features.  I don’t use the term “security token” for a digital asset that was not intended to be a security but somehow “missed“.

Moreover, it can become confusing when you have both utility (functionality) and traditional  security (debt/equity) elements combined.   Among other things, it can result in very adverse tax consequences where your instrument has all the disadvantages of being an equity security and yet is treated as the taxable sale of a product.   Not a good look.

AA: I was thinking a potential way that the crypto market would evolve where you would have a security token aspect and a utility token aspect and the security aspect could be the equity portion, as opposed to utility component of the project. I was just wanting your perspective and comments on that. 

LC: Yeah. That's a perfect segue to looking at the Quarters structure.  Pocketful of Quarters started out separating the economics of their business from the underlying functionality of the token.  As designed, the token has no reason to go up or down in value.  It is used for the purpose of allowing gamers to have a better experience playing online video games. The separate Q2 token which was used to help fundraise for the project is an investment token and it provides a revenue stream which, if the Quarters platform becomes successful, could be quite valuable.

AJ: What are the kind of different issues when you look at it from a securities framework and what are the prime considerations that they should have when they are figuring out their strategy?

LC: The critical questions to my mind are: 

  1. Are you seeking to create a decentralized marketplace for something?  

  2. Are you what I would call a “catalyst entrepreneur” - someone who puts a platform into motion but then is ready to step away from it?

  3. If you want to have a “company” and have a token, you need to think - what's my equity structure versus my token structure?

There is an important dichotomy here.  Either you are trying to create a decentralized network that can stand on its own without a traditional management team making decisions and you are planning on capturing the value of that network through the ownership of the blockchain tokens used to engage with the network (as per the “fat protocol” thesis first popularized by Union Square Ventures) or you’re not.  If you are creating a decentralized system, you may set up a legal entity to hold a portion of those tokens, but that is very different then being the management team that runs and operates the network and makes decisions as to its ultimate direction.

On the other hand, if your goal is to create an ongoing business that happens to use tokens, which business you intend to run more or less in perpetuity - that’s not decentralized.  So if you are creating an ongoing business you want to run and own, and you want to have a token as part of that business, I would recommend looking at the Quarters model.

As a sidenote, above I used the term “catalyst entrepreneur”, which I really like.  I first saw the term used in the book “The Starfish and the Spider”, which ai would highly recommend to anyone interested in these topics.  In short, a catalyst entrepreneur sets a network in motion and then walks away.  In theory, in a decentralized system whoever sponsored it isn't necessary to keep it going because if they are, it's not really decentralized.

Read | The Starfish and the Spider

AJ: What else is on the near-term horizon? How do you expect Libra to navigate these waters as you're looking at the SEC opinions? 

AA: I was going to add a slight piece to it. Is there a certain regulatory organization or agency  that you should focus on more or more than the other - SEC, CFTC, FinCEN,Treasury/IRS, etc

Facebook’s Libra complicated things being a global project and effort.

LC: I would say in answer to your last point first that the biggest concern from a regulatory point of view is what you just put your finger on - money transmission regulation, which is relevant both at the federal level and at the state level in the US.  My expectation is we're going to see a lot more enforcement activity in that area in the near future.  And that will get definitely people in blockchain much more focused.

To my mind one of the biggest challenges regulators have to find a way to motivate compliant behavior because this is an area where non-compliant behavior is, unfortunately, an option.

It seems like there are some in the US government (though not yet many) who would like to believe that they can put up a “great firewall” to keep all crypto activity out of the States.  But in the same way that the great firewall around China is ineffective at fully preventing such activity, I believe attempting the same here in the U.S. would also be ineffective, particularly where other jurisdictions are not necessarily supporting that approach.

So what I'd like to see are more affirmative steps like the Quarters no-action letter and the Blockstack Reg A+ qualification where different paths toward regulatorily compliant activity are being developed.  Otherwise,  we run the risk of seeing more and more activity migrate outside of United States.

AJ: Yeah, that conversation can be so fascinating as it rakes up all kinds of geopolitical issues. 

LC: Absolutely!  So that let’s us wrap up where we started - Why did I decide to go into this space?  Answer:  simply put, it's the most interesting work I think you can do right now as a lawyer.   When people ask me why we started  DLx Law, I ask “How could you not want to do this?”  That's my question.

AA & AA: Yes, It is the most interesting work you can do.

The Final Word | Differences Between Tokens, Coins and Virtual Currencies, Explained

Differences Between Tokens, Coins and Virtual Currencies, Explained
Image Credit: Cointelegraph

There are indeed differences between all of these terms, both major and minor. For instance, when JPMorgan Chase released its JPM Coin, it presented it as a “digital coin,” while Facebook’s Libra was introduced as a solid “cryptocurrency” — and, ironically, that could be part of the reason why regulators around the world got so worked up about the latter. 

Nevertheless, while JPM Coin and Libra are different by design, in both cases, decentralization pundits were quick to discard them as not “cryptocurrencies,” but “virtual money” or “digital currencies” — basically because they are run by corporations and hence are centralized. Unfortunately, it’s not quite as simple: While decentralization is a core ideology behind cryptocurrencies, some of them can be centralized, at least to a certain degree. [… Read More on CoinTelegraph]

About Proteum
Proteum is a global blockchain advisory firm that works with public, private and start-up companies to help them transition into the world of blockchains and decentralized applications. We help companies strategically build their ecosystem and unique capabilities so that they can own and control their future. ProteumX, our accelerator program, invests in and accelerates the time to market for companies building blockchain solutions. |  | Twitter: @proteumio | ProteumX

Bitcoin Futures on Baktt, India's Crypto Ban, and ETH Domain Names

Off the Blocks | Vol 77, July 23, 2019

Our views on blockchain technology & the changing investment, regulatory and tech landscape Get your friends to Subscribe Here.

Bitcoin and Libra - A Regulatory Perspective

Since Facebook announced Libra, its own cryptocurrency, it as gathered non stop attention from the media, businesses and government regulatory bodies across the world. It has been touted as the practical alternative to Bitcoin, shilled as the perfect on ramp for bringing almost 2 Billion unbanked people into the folds of financial security and of course ushering in world peace as a unified global currency. All of these are noble aims, but the reality is far removed from the hype. While Facebook has taken the first steps, the framework of building a truly decentralized platform has yet to be established, without which, the Libra will be regulated and relegated to yet another project that succumbed to corporate hubris.

To help regulate the emerging digital payments ecosystem and distinguish between bitcoin and private currencies like Libra, the the US Congress heard testimonies from those in the industry including Libra’s creator David Marcus. There was an interesting panel on Examining Facebook’s Proposed Cryptocurrency and Its Impact on Consumers, Investors, and the American Financial System.

As was borne out in the conversations, it is very hard to regulate bitcoin and Libra on any common framework. Bitcoin is an open, permission-less technology and the pioneering cryptocurrency. While the services built on top of top of the protocol can and will be centralized and controlled by ever innovative businesses, the platform itself remains free of control. While Bitcoin (and some other native cryptocurrencies) is an asset, Libra is asset backed. From a regulatory perspective, this is a big distinction in trying to bucket Bitcoin with the likes of asset backed currencies like the Libra.

Libra, in its current iteration, is fundamentally different. For all its future ambitions of being a decentralized system, Libra today remains a digital asset backed by traditional currency reserves and operates in a closed network. It will require identity verification and standard background checks such as know your customer to hold the currency. It is therefore puzzling why Facebook chose to launch without any banks as partners, specially when its aim is to provide banking services to unbanked people. Surely, Facebook did not miss the fact that unbanked people would eventually want to trade with entities that are tied into the banking system of today. Secondly, asset management is a highly regulated industry, so it is unclear why Libra should not be subject to similar regulations. The cost of compliance with these regulations will inevitably add to transactional costs - this directly undercuts the narrative of providing cheap financial services. So, it may be in Libra’s interests to disassociate itself from traditional financial services.

Or perhaps it is just power play and if so, that should be a big concern. Facebook’s reach extends to over 2B people. Even assuming that a fraction of the participants on the network may use Libra, it is set to become one of the largest banks in the world. This can be a source of custodial and systemic risks particularly when transferring money in lopsided financial markets such as “one way” remittance corridors. Since Libra relies on assets to back itself, it does little to dis-intermediate the incumbent third parties for custody, insurance and record keeping etc. As such Libra is subject to similar market risks as other currencies. Libra does expect that it will be licensed, regulated, and subject to supervisory oversight by the Swiss Financial Markets Supervisory Authority (FINMA). While it may not have an intention to compete against sovereign currencies, Libra’s sheer size, access and power will eventually blur the lines and provide a compelling argument to do so.

It will be interesting to see how countries react to regulating Libra. The German Bundesbank in its monthly bulletin “Crypto tokens in payment transactions and in securities settlement” is calling for a wait and watch approach ensuring that a number of important standards such as security, monetary and financial stability are not negatively affected, and payment transactions are not compromised. It also stressed:

A government should be as technology neutral as possible, so that the benefits of innovation can be made available for the financial sector.

Now some significant news form the world this week:

  1. Markets | Bakkt Begins Testing Bitcoin Futures Platform Following Hype and Delays: Bakkt, the long-awaited Bitcoin (BTC) futures platform from the Intercontinental Exchange (ICE), has begun testing the delivery of BTC futures. Bakkt’s Bitcoin futures are physically delivered via a process called warehousing, which will purportedly bode well from a price discovery standpoint, but cause some concern among regulators. Bakkt has experienced several delays regarding its launch as regulators like the United States Commodity Futures Trading Commission investigated the platform’s compliance procedures and its possible effect on markets.  

    There appears to be a critical mass of adopters ready to come on board on Day 1 of the Bakkt launch, with the sales team gaining traction among brokers, market makers, prop trading desks and liquidity providers.

    - Sam Doctor, managing director and quant strategist at Fundstrat Global Advisors

    [… Read More on CoinTelegraph]

  2. Telecom | KPMG Partners With Microsoft, R3: KPMG, is partnering with software firms TOMIA, Microsoft, and R3 to develop a blockchain for telecom settlements. KPMG has pursued industry-specific blockchain pilots in the past, with an eye to settling cross-border, or network, complexities. The latest partnership, with two distributed ledger (DLT) industry leaders, Microsoft and R3, continues in the vein of resolving the issues that arise from multi-party connections. Specifically, KPMG is looking to address the hard data issues that will arise from 5G connectivity. The company states that “international mobile data roaming revenues are expected to reach $31 billion in 2022, with an average annual growth rate of eight percent.”

    While we will be able to consume more data more quickly and across more locations than ever before in this next wave of telecom advancement, it is becoming increasingly complex for telecom companies to track and settle interchange fees.

    The blockchain being piloted aims to reduce the future costs, number of disputes, and time involved in telecom settlements caused by “billions of mobile interactions flow[ing] through hundreds of connected networks managed by dozens of customers and suppliers.”[… Read More on Coindesk]

  3. Tech | Blockchains Done Right Are the Next Evolution in Open Source: Open source code is more than just a way to create new technology. It’s a disruptive force that changed the way software is built, from taking individual developers and turning them into thriving communities to changing how enterprises do business–building open ecosystems versus restricted walled-gardens. Businesses have gained major advantages through the use of open source software. In the same way, decentralized blockchain infrastructure offers businesses increased security, robustness and most importantly, guaranteed transparency with its customers. [… Read More on DevOps]

  4. Fintech | As Facebook Struggles For Blockchain Support, A Truly Decentralized Challenger Emerges: The prevailing belief is that at some point the inherent contradictions in Facebook’s blockchain strategy and the Libra project are going to become too much to overcome. Of course, this assumes that the project launches at all, which is not certain given the regulatory scrutiny it faces around the world. This creates an opportunity for companies and projects like Celo, which are building pure blockchain-based financial services aimed at linking the nearly 2 billion people in the world that do not have access to bank accounts or the ability to verify their identity. [… Read More on Forbes]

  5. India | Govt Committee Recommends Ban on Cryptocurrency: India seems all set to ban private cryptocurrencies after an inter-ministerial committee (IMC) suggested outlawing private cryptocurrencies, like Bitcoin, apart from declaring any activities related to virtual currencies as a criminal act. The report lays down that all private cryptocurrencies except the ones issue by the state be banned in India and endorses the stand taken by the RBI to eliminate the interface of institutions regulated by the central bank from cryptocurrencies. Cryptocurrency has been defined as:

    any information or code or number or token not being part of any official digital currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchange with or without consideration, with the promise or representation of having inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes.

    [… Read More on IndiaToday]

The Final Word | EnCirca Accepting Pre-registrations for Blockchain Domain Names

Image: EnCirca

EnCirca announced that it is the first ICANN Accredited Registrar accepting applications for Ethereum's .ETH domain names. The deadline for applications is August 10, 2019. Ethereum is the world's second largest blockchain (after Bitcoin). Ethereum's .ETH was created to map human-readable domains names to blockchain wallets, facilitating ease of use. [… Register Now on EnCirca]

Billions of internet users will soon have blockchain wallets for sending and receiving crypto-currencies.  In response, EnCirca has made it easy for brand owners to protect their trademarks on the blockchain.

- Tom Barrett, President of EnCirca

The Ethereum Naming Service has two different application processes, depending upon the length of the desired domain name.

  1. Short Character .ETH Domain Names (3 to 6 characters) Short names, such as Apple.ETH, are expected to be in high demand and will attract multiple applicants.   To ensure that these short domain names are allocated to those who have already used the same string in a pre-existing domain like .COM or .US, Ethereum will award registrations to the applicant demonstrating the longest continuous use of the same name in an existing domain name extension, such as .COM, .US, .ORG etc. 

  2. Long Character .ETH Domain Names (7 or more characters)
    Long character names, such as Microsoft.ETH are available now on a first-come, first-served basis.  These long strings have been publicly available since May, 2017 and nearly 300,000 names have already been registered.

About Proteum
Proteum is a global blockchain advisory firm that works with public, private and start-up companies to help them transition into the world of blockchains and decentralized applications. We help companies strategically build their ecosystem and unique capabilities so that they can own and control their future. ProteumX, our accelerator program, invests in and accelerates the time to market for companies building blockchain solutions. |  | Twitter: @proteumio | ProteumX

Reg A+ Tokens, Samsung ID & Cavalier's Crypto Coin

Off the Blocks | Vol 76, July 16, 2019

Our views on blockchain technology & the changing investment, regulatory and tech landscape Get your friends to Subscribe Here.

Blockstack & Props | SEC Qualified Reg A+ Token Offerings

Last week was significantly epic in the annals of token history. The SEC approved not one but two security token offerings filed under Reg A+:

Both Blockstack and Props went to the press claiming they were the “First SEC-Qualified” Token. The tokens are now offered to both accredited and unaccredited investors in the US. Token holders will have a financial stake in the applications and network that these companies are building respectively.

The slight distinction between the tokens is how the offerings were structured.

In the case of Blockstack, the tokens worth $28M, are available for purchase in a cash offering. In addition, $12 million in tokens will be allocated to Blockstack’s App Mining Program, which rewards the developers who create the top-ranked applications within the Blockstack ecosystem.

For Props , App users who contribute value to the Props economy algorithmically earn Props Tokens that grant both in-app utility in the Props Network and a direct financial stake in the network they help grow. This model, allows for value to accrue with the users of the YouNow app and YouNow’s network of consumer oriented media applications.

Props Tokens cannot be purchased as part of this offering. They can only be earned by apps, users, and validators that will contribute to the Props Network.

That is a significant distinction between the two companies.

While this is good news for startups and the token economy in general, the roadmap for these tokens remains a bit fuzzy. There are significant questions related to their use, adoption as well as the regulatory environment under which they will operate.

  1. Will these tokens always remain a security, or is there a chance that the digital assets that represent an investment contract today may change over time?

  2. Will the companies themselves be registered as transfer agents or clearing houses or broker dealers?

  3. Are these business models impacted by the FinCEN and must comply with money transmission laws or Bank Secrecy Act?

  4. If these tokens are securities, do the Securities Investor Protection Act (SIPA) protections apply? This was a cause of concern for the SEC in its latest statement on custody of digital assets.

These questions will be resolved as more companies go down this path. The current financial infrastructure was built over decades, but it won’t take that long for the token economy to fully embrace a digital future.

Now some significant news form the world this week:

  1. Tech | Samsung Quietly Releases a Blockchain SDK for Dapp Creation: Samsung quietly released access to what they’re calling Samsung Blockchain that “helps developers to manage blockchain accounts easily.” Access to the SDK is currently limited – users aren’t able to download the SDK directly but must request access – and it’s not clear when users will be able to experiment with the code let alone use it in production. Samsung also announced its own KeyStore, a device-based private key storage system within Samsung’s security layer, called Knox.

    DApp does not need to make separate types of transaction that follows coin types by themselves anymore. The SDK offers a payment gateway for cryptocurrency remittance with its UI. To use this payment solution, DApp needs a keystore. With this, Samsung Blockchain SDK links users not only to the Samsung KeyStore but also to any external cold wallets as well.

    [… Read More on Coindesk]

  2. Data Centers | How to Think About Blockchain Security in a Federal Setting: CIOs in and out of government are giving the go-ahead to innovative blockchain projects in a bid to explore the technology and its potential to improve operations and service delivery. But planning for a blockchain project is a little bit different than other IT jobs. Blockchain projects are interesting for other reasons; for instance, public record keeping projects, which might have fallen out of favor or gone nowhere with traditional methodology, might be adapted to blockchain, spurring renewed interest and funding. In these projects, the key component is the data structure — the blocks of transactions — being maintained on the blockchain. These chunks of data could be anything that needs to be shared but unchangeable, from public records of transactions to everyday procurement documents. Without this shared, distributed and persistent data structure, the other components of blockchain are irrelevant.  Because blockchain is part of an application, and applications run on IT infrastructure, that means starting from something agencies know and understand very well: how to run and deploy applications on servers, whether in their own data center or out in the cloud. [… Read More on FedTech Magazine]

  3. M&A | Blockchain Financial Firm Diginex Goes Public in Reverse Merger With 8i: Blockchain financial services firm Diginex Ltd. is scheduled to go public through a reverse merger with investment holding company 8i Enterprises Acquisition Corp. Subsequently, the firm will be listed on the Nasdaq. Diginex is reportedly going to close a reverse merger deal with 8i, which will reportedly amount to $276 million including debt. Diginex shareholders will reportedly get 20 million ordinary shares of 8i, valued at $10 per share. According to Diginex’s CEO Richard Byworth, the deal is set to ensure broader market visibility for the company. As such, Diginex will be “the first fully-diversified blockchain player on Nasdaq. [… Read More on CoinTelegraph]

  4. Energy | Shell invests in Blockchain Clean Energy Startup: Oil and gas giant Royal Dutch Shell, commonly known as Shell, has invested an undisclosed amount in a New York-based clean energy startup. Shell joined Japanese trading giant Sumitomo Corporation to invest in LO3 Energy. The startup’s blockchain platform powers peer-to-peer energy platforms. LO3 operates the Exergy platform, which tracks the flow of energy as it’s added to a shared, local energy network. The Ethereum-based platform makes it possible for its users to verify with certainty that the energy they consume is sourced from renewable sources including windmills and solar energy panels. [… Read More on CoinGeek]

  5. Tech | Buterin Proposes Bitcoin Cash Integration to Scale Ethereum in Short Term: Ethereum co-founder Vitalik Buterin has proposed to using the Bitcoin Cash blockchain as a temporary scalability solution for the Ethereum network. While the first stages of the Ethereum 2.0 shift are expected to come in early 2020, Buterin has now suggested deploying other blockchains as a new option for improving Ethereum scalability in the short term. Specifically, Buterin said the Bitcoin Cash blockchain is a perfect match for this purpose as the hard fork cryptocurrency provides a data throughput of around 53 kilobytes (KB) per second, as opposed to Ethereum’s 8 KB. Additionally, Buterin outlined three other compelling reasons for using the blockchain, including low fees, the readiness of necessary machinery and the Bitcoin Cash community’s openness to people using the blockchain “for whatever they want as long as they pay the transaction fees.” [… Read More on CoinTelegraph]

The Final Word | Cavs and Cavs Legion GC Partner with UnitedCoin: [… Read More on]

Image Source:

The Cleveland Cavaliers and Cavs Legion GC (NBA2KL) have partnered with cryptocurrency blockchain provider UnitedCoin. The partnership will bring awareness to the UnitedCoin brand and platform, while providing the Cavs with a resource to capitalize on the burgeoning financial technology landscape. UnitedCoin is a multicurrency transaction platform that uses blockchain technology—an advanced method of securing, storing and transacting data over the internet—to offer members a fully-regulated and insured service where they can trade crypto and traditional currencies. [… Read More on]

As decentralized technology continues to evolve, we know it is important for us to stay ahead of the curve and plan for how it will impact our fan experience and business as we move forward. We are happy to team up with UnitedCoin, a like-minded company motivated by innovative technology to help us do that and are excited about how this partnership will bring blockchain technology to life for our fans.

- Nic Barlage, Cavaliers president of business operations

About Proteum
Proteum is a global blockchain advisory firm that works with public, private and start-up companies to help them transition into the world of blockchains and decentralized applications. We help companies strategically build their ecosystem and unique capabilities so that they can own and control their future. ProteumX, our accelerator program, invests in and accelerates the time to market for companies building blockchain solutions. |  | Twitter: @proteumio | ProteumX

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